Assistant Managing Editor

"If at first you don't succeed, try, try again," has long been the motto of die-hard biotech investors, who have continued funneling cash into troubled firms - sometimes even in the wake of disastrous clinical results - hoping that the next trial, or the next product will be the success story.

It's that kind of optimism that kept investors coming back to companies like La Jolla Pharmaceuticals Inc., which was able to raise $23 million in 2003 only months after lupus drug Riquent (abetimus sodium) missed endpoints in Phase III testing. Since then, La Jolla has pulled in additional financing - $17 million in a 2005 stock sale, $66 million through a PIPE and $34.8 million in a stock sale in 2007 - to fund an additional pivotal trial of Riquent, even as analysts remained skeptical of the drug's potential, and rightly so.

Riquent disappointed investors again in February after an interim analysis showed limited efficacy, leaving La Jolla with about $19.4 million in cash, equivalents and short-term investments as of Dec. 31, a drastically reduced work force and a management team considering strategic options, including liquidation.

In the past, a company like La Jolla might have been able to go back to investors with a revised business plan - a merger or in-licensing opportunity that could have kept the company alive.

That's what Amarin Corp. plc did in 2007. Following a Phase III blow-up of Miraxion in Huntington's disease, the company acquired Ester Neurosciences Ltd., gaining a pipeline of drugs, including a mid-stage compound in myasthenia gravis. And, still reeling from disappointing data from its Xyctrin (motexafin gadolinium) program, Pharmacyclics Inc. was able to bring in some additional compounds from Celera Genomics Group in 2006 to shore up its pipeline and motivate continued investment.

But with the lagging economy showing no immediate signs of recuperation, the patience of investors is rapidly waning. Even biotech investors, for whom the word "liquidation" once was conspicuously absent from their lexicons, are starting to demand that companies with failed products close up shop and return investments, rather than to continue chugging idly and spending shareholder money while company executives look for the next opportunity.

"When there is a lot of money out there, people can get away with anything, but when there's not a lot of money, capital efficiency goes under the microscope," said Oleg Nodelman, portfolio manager at Biotechnology Value Fund, which has been locked in a public battle for the last several months with Avigen Inc.

BVF, which owns about 30 percent of Avigen, had offered to buy the remaining shares of the company, with the aim of returning cash to shareholders. Avigen executives rejected BVF's offer, stating that they preferred looking at several strategic alternatives, though the firm's board finally decided to liquidate last month.

And BVF isn't the only biotech investor to take a public stance. Late last year, Deerfield Management objected to NitroMed Inc.'s proposed reverse merger with Archemix Corp. and ended up offering to buy the firm to return money to shareholders. In its letter to management, Deerfield said its plan would allow at least 50 cents per share and "potentially a good deal more" distributed to shareholders, while the reverse merger with Archemix would give NitroMed investors only 30 percent of the combined company.

While investment firms like Deerfield generally have eschewed public spats with their portfolio companies, it's a scenario that's likely to become more common and follows a trend "we've started seeing with the overall macroenvironment," Nodelman told BioWorld Financial Watch. "The financial world is tired of folks not living up to their fiduciary responsibilities."

Trading Below Cash and Nowhere to Go

In the past several months, a handful of biotechs already have opted for liquidation. Among those include Dynogen Pharmaceuticals Inc., a company working on drugs for digestive disorders that suffered a capital shortfall after failing to secure funding through an initial public offering and watching a potential $135 million reverse merger fall through in 2008.

Other firms - Neurological Technologies Inc., XTL Biopharmaceuticals Ltd. and Vasogen Inc., to name a few - are considering liquidation proceedings. XTL said in January that it was evaluating several merger proposals and had hired an investment banking firm to help assess those offers, but acknowledged that liquidation still could end up being the best alternative. XTL had been looking at strategic options since its lead program Bicifadine failed to show efficacy in a Phase IIb study in diabetic neuropathic pain in late 2008.

And more troubled biotechs likely will go the liquidation route in the immediate future, especially those trading below cash, which is "integral to getting cash back through liquidation," Nodelman said.

Only a couple of years ago, a biotech firm trading below cash was "an anomaly," he said. But now, "there are huge numbers trading below cash."

BioWorld Financial Watch tracks stocks for 215 U.S. biotechs. As of Dec. 31, about 30 of those were trading below. (Cash and market cap information were unavailable for six firms.)

Sometimes it's just bad luck. Nodelman called Icagen Inc. an "interesting example," since the firm trades below cash - $34.2 million in cash as of Dec. 31, while its current market cap is under $20 million - even though it operates a so far promising business developing small-molecule ion channel modulators and has ongoing clinical trials.

More often, however, companies see their market values plummet after a dose of bad news. Shares of Telik Inc., for instance, never recovered from the failure of pivotal cancer drug Telcyta (canfosfamide) last year. Though the firm, which continues advancing a Phase II-stage compound and a preclinical pipeline, ended 2008 with more than $60 million in cash, its current market cap is less than half that amount.

It's the firms with failed products for which liquidation becomes a viable option for shareholders.

Some companies have tried to avoid liquidation by setting themselves up as reverse merger targets, but while reverse mergers have been the saving grace for cash-seeking private firms in a closed initial public offering market, they tend to be much less palatable to shareholders of the cash shell firms since, as in the unsuccessful NitroMed deal, shareholders often end up with a small portion of a risky endeavor.

"You have to ask what kind of company wants to merge with a cash shell," Nodelman said. "It's often a company that can't raise money otherwise."

Even in the current market, "the 'A' companies are not having any trouble" raising funds, he added.

In fact, that's why investors like BVF are so anxious to get liquidation proceeds from a failed company, Nodelman said. "We're putting that money back into biotech." But with money tied up in a company that's essentially dead, "we can't deploy those funds" to other companies.

Hope for Success but Plan for Failure

According to Nodelman, one of the most frustrating aspects from the perspective of shareholders is that, in an industry where at least nine out of 10 compounds in development will fail before reaching the market, so many company executives still seem to be caught flat-footed when those dismal data roll in.

Then, rather than simply folding up and returning money to shareholders, those failed companies hang around a bit longer.

"Generally, the modus operandi for the board is to take six months to figure out that the drug blew up," Nodelman said. "Then they spend another 15 to 18 months looking" at strategic options, such as mergers or in-licensing deals.

He alleged that Avigen spent "more than 50 cents per share from the time the data came out" in October, showing that multiple sclerosis drug AV650 was ineffective in a Phase IIb study, to the time when the board decided to start liquidation proceedings.

"Companies never plan for failure," he said. "That's like not having an earthquake plan if you live in San Francisco."

But the current economic crisis and the industry's increasingly impatient shareholders could end up having a positive effect on the industry in the long-term. For one, it would get rid of those stagnant firms that have tied up investor funds on products unlikely to ever reach market.

It would also, Nodelman added, "force management teams to be capital efficient and to plan for not only success but potential failure."